Forced Fiduciary Standards is Socialism!

[VolAgent]

Why would you have a disincentive to trade if the person is charging you by the hour? There is no way in hell I'd pay someone $10k/year to "manage" a $1M portfolio. Their advice is likely no better than throwing darts at a board full of Vanguard funds. Then again, I don't trust anyone with my money but myself, and sure as hell wouldn't pay someone 1-2% a year PLUS the fees for transactions/mutual funds/etc to tell me where to put it. Those fees could add up to $1M+ over the course of 40-50 years easily.

You misunderstand. First of all, the investor isn't trading squat. The advisor is. Also, the money isn't in the hourly, but the asset management fee. Your money is in a discretionary account. The advisor has a disincentive to trade, even when it might benefit you. One, it takes time to trade, two it generates trading fees. Either the advisor eats them, or passes them on to you. Neither is preferable. One eats into the profit, the other makes you go, "Why am I giving this guy 10k a year, plus another 5k for trades??"

This is also why RIAs are generally against insurance. It takes money out of the managed account. They get paid once and make a big time investment, but now that money isn't available for management fees.

And Franz is right, hedge funds are a completely different world.

Either you have ethics, or you don't. Fees or commissions, it doesn't matter, the person needs to constantly find new clients and keep their money under "management". You want advice completely unbiased by monetary concerns, find someone who makes the same whether you put money with them or not. Just don't expect competent advice.

 

[dgoldenz]

I think you are misunderstanding me....a fee-only planner would not have an asset management fee. Therefore, they would not be managing any assets or controlling any accounts. A fee-only planner would not have any stake in whether a client buys insurance or not because they do not profit or lose from it, only get paid for consulting on the matter. Personally, I have no need for a planner whatsoever, but if I did, I sure as hell wouldn't pay someone 1% or 2% a year to tell me where I put my money.

Fund ABC beat the market last year by X%, whoopee. Find me a fund that beats the market 75% of the time over the course of 40+ years.

 

[VolAgent]

I think you are misunderstanding me....a fee-only planner would not have an asset management fee. Therefore, they would not be managing any assets or controlling any accounts. A fee-only planner would not have any stake in whether a client buys insurance or not because they do not profit or lose from it, only get paid for consulting on the matter. Personally, I have no need for a planner whatsoever, but if I did, I sure as hell wouldn't pay someone 1% or 2% a year to tell me where I put my money.

Fund ABC beat the market last year by X%, whoopee. Find me a fund that beats the market 75% of the time over the course of 40+ years.

Ah, but a fee-only planner has an interest in keeping the clock running as long as possible. An incentive for an overly complex plan. Not saying they would, but that is the goal, to keep the clock running.

Also, that is going to be hard to find. Generally its a person, not a system, that beats the market year after year. Look at Berkshire Hathaway and all the concern about Warren Buffet. They pretty much know its game over once he's gone. Its unlikely his successor can do half as good.

 

[scagnt83]

When consumers begin to realize they will get better results paying a fee they will no longer have to hope their advisor is not abusing their trust making money off of transactions. Fiduciary trumps suitability every time. I can prove that with nearly every client I have that had a previous advisor who was essentially a salesman.

I will talk to anyone who is willing to pay my fee and assist in their planning ($150/hr, avg 6-10hrs per plan). Whether or not I choose to accept their assets is another issue. I do not have a true minimum asset level rather a minimum annual AUM fee of $1000; everything under $1m @ 2%, $1-5m 1.5%, and above at 1.25%

Ok. First off, I have nothing against your business model. It is needed; and at one time I thought I might want to take my practice to that level.

But your quotes above are the exact reason why this model is not in the best interest of most.

Most IRA owners (who the DOL wants to be covered by their definition of a Fiduciary Standard) have less than $1mill in their account!!
Is it in their best interest to have a 2% AUM fee if they only have $100K in assets???


When someone has $5mill in assets and needs them managed, then they certainly could be benefited by working with a RIA who acts as a fiduciary.

But when Joe Plumber needs a place to roll $100k out of an old 401k; after paying $1000 to sit down, and then a 2% AUM fee, he is at 3% for first year fees.
And you and me both know that $100k isnt enough to properly diversify yourself in stocks, so he will be in some type of funds which will tack on at least another 1%; which raises him up to 4% in first year fees, and 3% min after that.

And what if all he wants is a CD? Or an annuity?

My problem isnt with fee based advice. Its with the unintended consequences of the overreach of government regulations.
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Also, I don't see how conventional investment wisdom and current practices would take precedent over client risk preference. CW has a way of changing. And fiduciary duties don't override suitability, they enhance it.

Ah, but here lies the problem with using a Fiduciary to manage your money.

Most who are Fiduciaries do not act under a true Fiduciary Standard. Thus most do not realize what it truly entails.

A Fiduciary must always act in the best interest of the client, even when the client does not agree with the decision.

This has been established in courts.

Trustees must act as a Fiduciary for beneficiaries. (Fiduciary Standards have evolved from 100s of years of trust laws)

There was a case that involved Chase bank where the client created a trust and demanded the trustee keep it fully invested in Kodak stock. The court ruled against the fiduciary, even though the fiduciary was just following the client's instructions, because the fiduciary had a greater duty and
failed to invest appropriately. In essence, the court said "the client is not always right."

To the Fiduciary, the client is not the one giving you the money, the client is the beneficiary (the one using the money). The client is no longer the 40yo who is investing, its the 65yo who is drawing retirement income from that money.

How many times has a client made a bad decision that you advised against?
What did you say to that inside your head? Maybe the phrase "well thats their right to do that" passed through at some point....
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I think you are misunderstanding me....a fee-only planner would not have an asset management fee. Therefore, they would not be managing any assets or controlling any accounts. A fee-only planner would not have any stake in whether a client buys insurance or not because they do not profit or lose from it, only get paid for consulting on the matter.

Not true.

You have two different models.
Fee only.
Fee based.

Fee only means that they do not take any commissions at all.

Fee based (which most RIAS operate as.... I think its around 80%), charge a planning fee and take commissions from sales.

They can also take a Fee for the plan and then an AUM fee for ongoing upkeep of the plan. (which is what most "fee only" planners do)


Ultimately, its hard to avoid conflicts of interest. The best thing you can do is to require full disclosure, and even that has grey areas.


Take an advisor who has an AUM fee. If they advise the client to purchase LTCI, then they are taking assets away from their yearly fee. Not only that, but they are putting $5k in someone elses pocket!

If they take commissions and sell the products they recommend, then they have the lure of a $5k lump sum commission vs. what would be $700 in fees...


If you have a true fee only advisor who does not take an AUM fee, but just charges hourly period. Then that is as close to nonbias as you will find.
But most who operate on that model charge a lot more than $150/hour ..... try around $300 to start!
You are speaking of an advisory model that fits maybe 5% of the population.

Again, nothing wrong with it. But on a feasibility level, only around 5% of the population are able to afford truly non biased advice.
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Fiduciary trumps suitability every time. I can prove that with nearly every client I have that had a previous advisor who was essentially a salesman.

To an extent maybe....
But its more a problem with compensation models rather than with the regulations.

Many studies show that most consumers can not tell the difference, do not know the difference, and even after being informed of the difference still do not care.


But to the credit of the IAR, direct sold funds have outperformed broker sold funds by about 1% over the past 20 years.

But the DOLs regulations do not just affect securities.
They want to affect IRAs in general.
And the only justifications they are giving to implement this are securities related.